Vicious and Virtuous Circles - The Political Economy of Unemployment in Interwar UK and USA

Kent Gerard Matthews (), A. Patrick L. Minford and Ruthira Naraidoo ()

No E2006/7, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: The 1930s in the UK and USA is remembered as the decade of mass unemployment. We develop a model of equilibrium unemployment based on the Meltzer and Richard (1981) model of redistribution financed by distortionary taxation. This model is extended to the UK and the US interwar period to provide a theory of an endogenous natural rate of unemployment. The theory here sees the natural rate and the associated equilibrium path of unemployment as a reaction to shocks (mainly demand in nature) and the institutional structure of the economy. The channel through which these two forces feed on each other is a political economy process whereby voters react to shocks by demanding more or less social protection. The reduced form results obtained confirm a pattern of unemployment behaviour in which unemployment moves between high and low equilibria in response to shocks; and further evidence is obtained by structural estimates for the UK.

Keywords: Equilibrium unemployment; political economy; 'vicious' and 'virtuous' circles; threshold model; bootstrapping (search for similar items in EconPapers)
JEL-codes: E24 C10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2006-01
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Related works:
Working Paper: Vicious and Virtuous Circles - The Political Economy of Unemployment in Interwar UK and USA (2006)
Working Paper: Vicious and Virtuous Circles - The Political Economy of Unemployment in Interwar UK and USA (2008)
Working Paper: Vicious and Virtuous Circles - the Political Economy of Unemployment in Interwar UK and USA (2006)
Journal Article: Vicious and virtuous circles -- The political economy of unemployment in interwar UK and USA (2008)
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